McAfee Corp. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FTW based upon McAfee Corp.’s economic interest in FTW. FTW is a pass through entity for U.S. federal income tax purposes and will not incur any federal income taxes either for itself or its U.S. subsidiaries that are also pass through or disregarded subsidiaries. Taxable income or loss for these entities will flow through to its respective members for U.S. tax purposes. FTW does have certain U.S. and foreign subsidiaries that are corporations and are subject to income tax in their respective jurisdiction.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities (“DTAs” and “DTLs”) for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. If we determine that we would be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the DTA valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The income (loss) from continuing operations before income taxes expense includes the following components:


	Year Ended
(in millions)	December 25, 2021			December 26, 2020			December 28, 2019
U.S.	$	(2	)	$	(230	)	$	(193	)
Non-U.S.		89			25			42
Income (loss) before income taxes	$	87		$	(205	)	$	(151	)

The provision for income tax expense (benefit) from continuing operations consists of the following:


	Year Ended
(in millions)	December 25, 2021			December 26, 2020			December 28, 2019
Current:
Federal	$	2		$	—		$	—
State		8			2			—
Non-U.S.		33			7			31
Total current		43			9			31
Deferred:
Federal		(178	)		1			1
State		(26	)		—			2
Non-U.S.		1			(5	)		4
Total deferred		(203	)		(4	)		7
Provision for income tax expense (benefit)	$	(160	)	$	5		$	38

The difference between the tax provision and the tax provision computed at the U.S. federal statutory income tax rate for each period was as follows:


	Year Ended
(in millions)	December 25, 2021			December 26, 2020			December 28, 2019
Income taxes computed at the U.S. federal statutory rate	$	18		$	(45	)	$	(33	)
Non-U.S. income taxed at different rates		8			4			8
Withholding taxes		5			6			6
State tax expense		(18	)		2			2
Partnership earnings flow through to partners		—			22			45
Redeemable noncontrolling interest		(39	)		17			—
Valuation allowances		(188	)		24			—
Foreign tax credits		(14	)		(2	)		—
Uncertain tax positions		—			(11	)		9
Investment in partnerships		6			(11	)		—
Tax receivable agreement		64			—			—
Other		(2	)		(1	)		1
Provision for income tax expense (benefit)	$	(160	)	$	5		$	38

The components of the deferred tax assets and liabilities are as follows:


(in millions)	December 25, 2021			December 26, 2020
Deferred tax assets:
Accrued compensation and other benefits	$	—		$	2
Deferred revenue		29			24
Share-based compensation		2			3
Net operating losses		33			74
Credits		10			51
Intangibles		261			151
Interest expense carryforward		—			5
Investment in partnership		136			—
Other		5			—
Total deferred tax assets		476			310
Deferred tax liabilities:
Unremitted earnings of non-US subsidiaries		(7	)		(1	)
Investment in partnership		—			(78	)
Total deferred tax liabilities		(7	)		(79	)
Valuation allowance		(19	)		(212	)
Net deferred tax assets (liabilities)	$	450		$	19
Reported as:
Deferred tax assets	$	460		$	24
Deferred tax liabilities		(10	)		(5	)
Net deferred tax assets (liabilities)	$	450		$	19

As of December 25, 2021, our deferred tax assets were primarily comprised of intangibles acquired in connection with reorganization transaction including basis adjustments created upon partner exchanges, investment in partnership, net operating losses, and amounts related to deferred revenue. As of December 26, 2020, our deferred tax assets were primarily comprised of intangibles acquired in connection with the reorganization transactions, net operating losses, credits and amounts related to deferred revenue.

As of December 25, 2021, our deferred tax liabilities were primarily comprised of unremitted earnings of Non-U.S. subsidiaries. As of December 26, 2020, our deferred tax liabilities were primarily comprised of outside basis differences due to the Reorganization Transactions and prior acquisitions.

As of December 25, 2021, we had federal, state, and non-U.S. net operating loss carryforwards of $3 million, $94 million, and $95 million, respectively, available to reduce future taxable income. The non-U.S. net operating loss carryforwards expire at various dates through 2032. The federal and U.S. state net operating loss carryforwards expire at various dates through 2033. The net operating loss carryforwards and credits in the U.S. relate to the Reorganization Transactions and, as a result, are limited in the amount that can be recognized in any one year.

As of December 25, 2021, we are not permanently reinvested; therefore, we have recognized deferred taxes for all of our undistributed earnings of certain foreign subsidiaries.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On July 27, 2021, we completed the divestiture of the Enterprise Business (Note 4). As a result of the divestiture, we expect to utilize certain deferred tax assets from the domestic portion of the gain on the sale. In addition to objectively verifiable evidence, we have considered subjective evidence, such as our projections for future growth, in evaluating if the realizability of the net deferred tax assets has met the more likely than not recognition criteria. We have concluded that a full valuation allowance against the net deferred tax assets of our domestic entities will no longer be required. During the year ended December 25, 2021, we have released $211 million of the $212 million of valuation allowance that existed as of December 26, 2020. The valuation allowance of $19 million as of December 25, 2021 relates to foreign capital losses and state net operating loss carryforwards primarily generated in the current year that we have determined are not more likely than not going to be utilized. In addition, we recognized a deferred tax asset of $223 million with a corresponding charge to when FTW LLC Units are exchanged for shares of Class A common stock (the “Exchanges”) in fiscal 2021.

Changes to our deferred tax assets consisted of the following:


			Offset To
(in millions)	Deferred Tax Asset		Additional Paid-in Capital		Provision for Income Tax (Expense) Benefits		Income from Discontinued Operations
Release of valuation allowance on deferred tax assets	$	211	$	—	$	211	$	—
Exchanges and tax attributes in Fiscal 2021		223		223		—		—

A reconciliation of the aggregate changes in the balance of gross unrecognized tax benefits was as follows:


	Year Ended
(in millions)	December 25, 2021			December 26, 2020			December 28, 2019
Beginning gross unrecognized tax benefits	$	17		$	27		$	12
Settlements with taxing authorities		(2	)		—			—
Increases in tax positions for prior years		5			—			—
Decreases in tax positions for prior years		(7	)		(14	)		—
Increases in tax positions for current year		2			4			15
Ending gross unrecognized tax benefits	$	15		$	17		$	27

We recognize interest and penalties related to unrecognized tax benefits within the Provision for income tax expense on the consolidated statements of operations.

We consider many factors when evaluating and estimating our tax positions, which may require periodic adjustments and may not accurately anticipate actual outcomes. Tax position recognition is a matter of judgment based on the individual facts and circumstances of our position evaluated in light of all available evidence. As of December 25, 2021 and December 26, 2020, we had uncertain tax positions of $14 million and $16 million, including interest and penalties, respectively, recorded within Deferred tax assets, Other long-term assets, and Other long-term liabilities on the consolidated balance sheets. In the next 12 months, it is reasonably possible to have an audit closure or statue expirations in one of our foreign jurisdictions. We do not believe the amount to have a significant impact to our consolidated financial statements. A portion of uncertain taxes positions has been indemnified by Intel (Note 7).

We are subject to examination by taxing authorities for income taxes in many of the domestic and foreign jurisdictions in which we operate. As of December 25, 2021, we are no longer subject to U.S. federal income tax audits for years prior to 2018, state and local income tax audits prior to 2015 and foreign taxing authorities prior to 2004. We are unable to make a reasonably reliable estimate as to when or if settlements with taxing authorities may occur. However, we do not anticipate that the resolution of these tax matters or any events related thereto will have a material adverse effect on our business, results of operations, financial condition or cash flows.

Pursuant to our election under Section 754 of the Internal Revenue Code (the “Code”), we expect to obtain an increase in our share of the tax basis in the net assets of FTW when FTW LLC Units are redeemed or exchanged by the Continuing LLC Owners and MIUs are redeemed or exchanged by Management Owners. We intend to treat any redemptions and exchanges of LLC Units as direct purchases of LLC Units for United States federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

In October 2020, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits recognized resulting from our future taxable income, as a result of: (i) all or a portion of the Corporation’s allocable share of existing tax basis in the assets of FTW (and its subsidiaries) acquired in connection with the Reorganization Transactions, (ii) increases in the Corporation’s allocable share of existing tax basis in the assets of FTW (and its subsidiaries) and tax basis adjustments in the assets of FTW (and its subsidiaries) as a result of sales or exchanges of LLC Units after the IPO, (iii) certain tax attributes of the corporations acquired by McAfee Corp. in connection with the Reorganization Transactions (including their allocable share of existing tax basis in the assets of FTW (and its subsidiaries)), and (iv) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. The Corporation generally will retain the benefit of the remaining 15% of the applicable tax savings. The payment obligations under the tax receivable agreement are obligations of the Corporation. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Corporation each year, as well as the tax rate then applicable. The determination of the TRA liability involves the interpretation and application of complex tax laws and regulations. The key inputs utilized in determining the TRA liability include the partnership tax basis, net operating losses (“NOLs”), and foreign tax credits.

As the net deferred tax assets have been recognized as of the date of divestiture of the Enterprise Business, the full liability under the TRA also became probable as of that date. During the year ended December 25, 2021, TRA liability increases of $121 million resulting from post divestiture Exchanges were recorded to Additional paid-in capital on the consolidated balance sheet. TRA liability increases of $313 million resulting from pre-divestiture Exchanges and TRA liability decreases of $6 million resulting from unutilized tax attributes were recorded within Other income (expense), net. TRA liability increases of $4 million resulting from divestiture related events were recorded within Income from discontinued operations on the consolidated statement of operations.

As of December 25, 2021, we have TRA liabilities of $2 million and $432 million recorded in the consolidated balance sheet within Accounts payable and other accrued liabilities and Tax receivable agreement liability, less current portion, respectively.


	TRA Liability				Offset To
(in millions)	Current Portion		Noncurrent Portion		Additional Paid-in Capital			Other Income (Expense), Net			Income from Discontinued Operations
As of December 26, 2020	$	2	$	—
Exchanges and tax attributes that existed prior to divestiture		—		317	$	—		$	(313	)	$	(4	)
Exchanges and tax attributes that existed on or after divestiture		—		115		(121	)		6			—
As of December 25, 2021	$	2	$	432	$	(121	)	$	(307	)	$	(4	)

See Note 1 for further information on changes to the TRA upon completion of the Merger.